JP Morgan has reiterated its 'overweight' rating on European banks, arguing the sector remains in what it calls a "perfect environment" for growth despite early signs of the interest rate cycle turning.
Analyst Kian Abouhossein said the sector benefits from a "sweet spot" of European Central Bank rates between 2% and 3%, alongside lending momentum supported partly by artificial intelligence capital expenditure.
He also pointed to strong capital markets performance amid upward-trending equity markets, continued cost discipline, and no signs of material asset quality deterioration given low unemployment.
JP Morgan said this combination of factors should drive average pre-provision profit growth of 8.8% a year between 2025 and 2028.
The bank said management teams across the sector had so far remained rational around mergers and acquisitions, supporting an attractive shareholder payout of around 75% of total profits.
This is expected to produce a total payout yield of 7.7% by 2028.
JP Morgan's new European banks top picks portfolio includes Deutsche Bank, UBS, ING, NatWest Group PLC (LSE:NWG), Standard Chartered and Erste Group.
The bank's outlook comes as European lenders continue to benefit from strong lending volumes and a favourable interest rate environment, with several major banks having raised their lending income guidance for 2026.
